Microsoft says Linux may mean price cuts

Microsoft has filed a report with the U.S. Securities and Exchange Commission warning that 2005 could be challenging, as Linux continues to steal business and PC sales remain sluggish.

"For fiscal 2005, we believe industrywide factors such as PC unit growth and the success of noncommercial software could significantly affect our results of operations and financial condition. PC unit growth was very strong in fiscal 2004, increasing approximately 13 percent from fiscal 2003. We do not expect similar growth to occur in fiscal 2005," the filing stated.

As well as suffering from a lack of PC buyers, it seems that Microsoft fears that Linux might pick up some of its market share.

"We continue to watch the evolution of open-source software development and distribution...We believe that Microsoft's share of server units grew modestly in fiscal 2004, while Linux distributions rose slightly faster on an absolute basis," the filing said.

"The increase in Linux distributions reflects some significant public announcements of support and adoption of open-source software in both the server and desktop markets in the last year. To the extent open-source software products gain increasing market acceptance, sales of our products may decline, which could result in a reduction in our revenue and operating margins."

Many of the concerns listed in the filing, such as the threat from Linux and the pressure on license, have become boiler plate in recent years. In addition, Microsoft predicted in its recent earnings forecast that PC sales could slow.

Antitrust concerns are also playing a part in the newly modest outlook, with the company hoping to resolve all the remaining antitrust scraps for between $1.1bn (£620m) and $1.2bn.

The filing also lists where Microsoft has identified potential market opportunities. Expect to see Microsoft gunning for the search segment, putting on big consumer technology (TV, games, video) drive and trying to woo small and midsize businesses.

For a company thought to have a cash mountain of some $60bn, such worries might seem premature, but the Redmond, Wash.-based company has been on a cost-cutting drive that saw office giveaways for things like soda and towels dry up, as chief executive Steve Ballmer announced that the company would be aiming to shave $1bn off its operating costs.

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